Friday, July 18, 2014

Is it 1999 all over again?

The
ebullient mood on Wall Street today was stimulated by a rash of merger and
acquisition announcements.

Consider
the following: In the energy sector, Kodiak Oil & Gas (KOG) agreed to be
acquired by Whiting Petroleum (WLL), resulting in a sizable jump for both
stocks. Among industrials, URS Corp.
(URS) agreed to be acquired by Aecom (ACM), leading to 10-12% leaps for both
stocks. Among health care companies,
Shire Pharmaceuticals (SPHG) was reported to have accepted a $53 billion
takeover bid AbbVie (ABBV); also, Mylan (MYL) announced a $5.3 billion deal to
purchase a segment of Abbot (ABT).

If
you get the feeling that M&A is becoming bubbly, you’d be right. According to the Business Insider web site, the first quarter of 2014 witnessed the
largest aggregate deal value since 2007 and the largest average deal size since
2007 (see chart below). In the second
quarter alone, there were three U.S. merger proposals worth at least $40
billion, says MergerMarket’s M&A Trend Report: Q1 2014.

Zacks,
meanwhile, points out that M&A activity hit a 7-year peak as of June 26
with consolidate deal values increasing 75% year over year to $1.75
trillion. While it’s true that the
return of “merger mania” often marks the terminal phase of a bull market, it
would appear that this particular M&A boom still has some room to run
before topping out. Due to the enormous levels
of cash on corporate balance sheets in recent years, not to mention record low
interest rates and favorable credit markets, the M&A trend has had lots of
fuel behind it.

So
while the M&A trend is definitely building momentum, it hasn’t yet turned
into the dangerous “merger mania” episode of the 1990s. Mergers and acquisitions are symptomatic of
the greed (or “irrational exuberance” as Alan Greenspan put it) which
accompanies the late stages of a bull market.
At some point, however, the trend will run to an extreme – just as it
did in the late ‘90s – and will evoke its own reversal as per the “Rule of
Alternation.”

While we’re on the subject of irrational
exuberance, another newsworthy item came to our attention today which reminded
us of the late ‘90s. Remember the
Internet stock craze and the often ridiculous valuations (or lack thereof)
behind many Internet startups of those days?
Well it would appear that the bromide “history repeats” is playing out
once again. A company operating under the name of Cynk Technology Corp (CYNK), which
markets itself as a social network firm, is headquartered in Belize and has
just one employee. Moreover, the company
has no reported revenue and zero assets, yet its stock price has rallied
25,000% since June is now worth $6 billion as of last week.

Comenting on CYNK, options
strategist Jacob Mintz of Cabot Options
Trader said: “It appears to be a case of ‘pump and dump’ gone haywire. The
SEC finally stepped in on Friday [Jul. 11] and halted trading of the stock due
to concerns about “the accuracy and adequacy of information in the marketplace
and potentially manipulative transactions in CYNK common stock.” Could the stock symbol for this company turn
out to be a prescient, yet ironic, commentary on the company’s future?